The earliest accounts for the concepts of insurance go back to ancient Babylonia, and most likely the history of insurance fraud does too. Nearly all fraud has its roots in greed or fear (or both), and when this is accompanied by the perception of being able to succeed along with a broken moral compass, fraud schemes are hatched. Insurance fraud is no different, and the risk-to-reward ratio can be staggering – particularly with life insurance because the premiums are so low compared to the payout. Fraud with other types of insurance, while the potential for severity on a single case can be significant, tend to be more frequent with less severity on each individual case. However, over time the impact of all types of insurance fraud can be significant. Some of the basic types of fraud schemes for life and living benefits insurance are highlighted below.
Common living benefits insurance fraud schemes:
- Falsifying symptoms / ADLs: economic pressures from loss of employment, under employment, or simply inflationary pressures are motivating people to exaggerate symptoms to qualify for insurance benefits. These actions may also be perpetrated by someone who has become accustomed to working from home who now begrudgingly must return to the office. They can affect disability-based benefits as well as long-term care, chronic illness, and critical illness insurance benefits. Insurance is being seen as a means of financial support. Well-structured, probing interviews of the insured and possibly others, enhanced OSINT research, along with skilled surveillance is often required to uncover such schemes.
- Provider fraud through falsifying services rendered: these schemes often involve providers of health care, including home health care workers, who falsify the services provided or the time spent in a household. The result is the payment of undue benefits to the beneficiary or provider. This is particularly prevalent when the service provider is related to the insured or collusion exists. Coding schemes by medical offices to obtain unjustified benefits from health (medical) insurers is also a challenge.
- Identity theft and account takeovers: Someone’s stolen identity can be used in countless fraud schemes including taking out insurance on the victim’s life and taking over existing accounts. For insurance contracts that contain cash value, using someone’s identity to change the insured’s contact information can then lead to withdraws from the accounts. This type of scheme is particularly troublesome when the accounts taken over involve seniors and their annuity contracts.
- Falsifying occupational duties: Many living benefit policies and riders provide benefits when the insured cannot perform their occupational duties due to an accident or illness. Inflating or falsifying the duties required of the insured’s occupation, either at time of application or claim, can result in fraudulently obtained benefits. For self-employed insureds and business owners, determining the occupational duties may require forensic audits to evaluate sources of income pre-disability and during the period disability is claimed. For example, a medical provider may claim a loss of income due to the inability to perform surgery after an accident or illness; however, a forensic audit of the billing records may find that the medical provider’s income from surgeries was insignificant.
- Falsifying income information: The amount of coverage a company is willing to issue to an applicant for policies designed to replace lost income due to an accident or illness is based on the income of the applicant. Income replacement ratios are generally 67% or less, depending on taxability of the benefits. At time of claim, benefits are often based on calculating the pre-loss income with the current income, if any. Falsifying the income either at the time of application, preceding the period of disability, or during claim can result in undue benefits being paid. To investigate suspicious activity, forensic audits may be required.
- Agent schemes: Agents are not immune to the lure of easy money through fraudulent activity, and they may be tempted to commit acts such as churning and twisting policies to generate commissions at the detriment of the consumer. In other schemes, agents collect money from insureds without remitting the funds to the insurer. Agents have also been known to collude with others who are involved in schemes to defraud insurers. Vetting new agents through comprehensive background checks along with monitoring blocks of business sold by an agent are helpful tools to mitigate these risks.
Common life insurance fraud schemes:
- Wagering contracts: these schemes are perpetrated by criminals who take out insurance on other individuals who have limited or no knowledge that the insurance is being placed. While an insurable interest is required to purchase insurance on the life of another, relationships between the insured and the policy owner is generally misrepresented or not questioned by insurers. Often, the proposed insureds are represented on applications as being healthy when they are not. Stolen identities are also frequently used to perpetrate this type of fraud. Wagering schemes often involve the applicant also falsifying income information to obtain more insurance than otherwise would be available.
- Falsified deaths: Criminals in this type of scheme may attempt to falsify the death of the insured through a variety of means. One method is to switch the identity of someone who is deceased with that of the insured. This can be done through killing an innocent person or by finding an unidentified deceased person and then claiming them as the insured. Another scheme involves switching the identity of someone who is ill with that of the insured, and then waiting for them to pass. Often, investigators associate falsified deaths with foreign deaths; however, this also occurs in the U.S. and Canada. Note that the beneficiary may be involved in such schemes, or they may be a victim themselves.
- Missing persons: Occasionally, insureds will stage their disappearance in a manner to suggest that they have died allowing the insurance proceeds to be paid out. There are many notable examples of missing persons where the insured is ultimately found alive.
- Falsified documents: Criminals will often falsify either the underlying documents necessary to register a death, or the death certificates directly. While often associated with foreign deaths, this occurs in the U.S. and Canada as well. Investigating the circumstances of death along with skilled interviews of the officials who allegedly completed the documents often reveal the crimes.
- Falsifying medical history: Most life insurance applications are sold under the pretense that the proposed insured’s health, occupation, and vocational habits are as stated in the application. Since the insurance industry has been moving away from traditional safeguards to insure the accuracy of the information contained in the application, more cases of falsifying the information in the application is occurring.
- Homicide: Yes, unfortunately, there are those who are willing to kill another for the insurance proceeds. Most often, the homicides are staged to look like the death was natural or an accident thus avoiding scrutiny. Law enforcement in many jurisdictions is simply overwhelmed, and the death may not arouse enough suspicion to investigate. Many times, law enforcement may not know about the insurance that created the motive, and it is the insurance investigation that leads to uncovering the crime.
These are some of the more common schemes seen, but there is no limit to the types of schemes criminals are willing to attempt. Preventing losses involve ensuring that the information provided by applicants and claimants is accurate and complete. Most claim investigations find that the claim is legitimate, but the cost of the unjustified claims paid impact the insurer and ultimately the consumer as costs are passed to the consumer through higher prices.
There are many excellent tools available to investigate and evaluate claims, and as the environment changes, the tools also have had to adapt and evolve. For example, methods of surveillance have had to adapt to more people working from home and the proliferation of home video devices such as the Ring doorbell camera. Methods of underwriting have also had to adapt to ensure the identity of the applicant and that the applicant’s information is as represented. Cyber investigations using OSINT technology have also evolved and become more sophisticated. Synthetic identities and hybrid identities are easier than ever to create and to spoof traditional controls, so the tools to identify these have had to adapt.
Keys to defeating fraud involve several main components:
- Educating all those involved in the issuance and administration of insurance, and ultimately the payment of claims, to the cost and impact of fraud is the first step to mitigating risks. Understanding that fraudulent behavior can occur throughout the life of the policy beginning with the sale of the policy, along with signs that may point to fraudulent behavior is important. Unless there is an awareness of the importance of defeating fraud and the typical schemes used, fraud will go undetected.
- Establishing sound procedures to prevent fraudulent policies from being issued. This entails making sure identities of applicants are verified and that the information provided at time of application is complete. Historic inspection reports are now evolving into identity verification techniques using biometrics and geofencing along with OSINT and third-party data verifications. It is also important to properly vet and monitor agents for potential misconduct.
- When claims occur, properly evaluate the data provided and verify the accuracy of the data. Fraud can occur at any policy duration, and most states have statutes classifying insurance fraud as a crime. Even if a policy has aged, if there is predication to investigate, then one should consider this. Using investigators who understand insurance and how people commit fraud is important. Uncovering fraud whether utilizing interviewing techniques, knowing where to probe for evidence, or conducting surveillance, is often an art that requires skills learned over time. Properly written reports with appropriate supporting documentation that can withstand legal scrutiny are also paramount.
- Report suspected fraud to the appropriate authorities. Most states require that insurers report suspected fraudulent cases, and this is important so that fraudsters are held accountable for their actions.
Insurance fraud will continue as long as there is insurance in existence. Understanding the types of schemes is the first step to protecting one’s company and the consumer. Ensuring the information received by applicants and claimants is true and accurate is critical to identifying attempts at committing fraud. Fraudsters will find those companies whose processes are not evolving with changes in the environment. Insurance companies need to make sure they are evolving and partnering with experts to insure they do not become a target.
Diligence International Group, LLC. is a data verification and investigation company with a domestic and international network of professionals who specialize in assisting insurance companies review processes and validate the information they are receiving.
Paul Marquez is Vice President of Diligence International Group, LLC specializing in living benefit validation solutions along with underwriting and identification solutions.
Kevin C. Glasgow, FLMI, FLHC, CLU®, CFE is Vice President of Diligence International Group, LLC, and is a 35-year veteran of the insurance and reinsurance fields specializing in the claims management, investigations, and defense against fraud. He is also the former president of the International Claim Association and the Eastern Claim Conference.